Mortgage refinance affects your credit score because it will take a hit, however temporarily, each time you complete a credit application. New debt amount, credit inquiry, and length of credit history each contribute to that hit. The following is a breakdown of how mortgage refinance affects your credit score:
Credit inquiry. When a lender conducts a hard credit check after you submitted a credit application for a refinanced home loan (or a credit card), it will lower your credit score temporarily. Of your credit score, hard credit inquiries comprise 10%. If you complete numerous applications within a shorter time period, that signals to credit bureaus that you are shopping for the best rates. Completing fewer applications several months apart, however, may be counted as separate inquiries, each of which could cause a brief dip in your credit score.
Average age of your credit history matters. Since mortgage refinance can appear on your credit report as a new loan, it will drop the average age of credit history. Of your total credit score, the age of your credit history comprises 15%. Shorter credit history signals to potential lenders and creditors that you are inexperienced in managing credit, even though making payments promptly and accumulating new credit is good for your credit score in the long term. It is not the biggest factor, but it does affect your total score.